May 2021

INCOME TAX ON CORPORATIONS

Atty. C. Llamado

An Overview of Corporate Taxes

A corporation may be liable for at most seven (7) types of income taxes, namely:

Net Income Tax (on Ordinary Income)

Standard Income Tax Final Withholding Tax (on Passive Income)

Capital Gains Tax (on “Capital Gains”)

Minimum Corporate Income Tax (“MCIT”)

Penalty Income Tax

Improperly Accumulated Earnings Tax (“IAET”)

Gross Income Tax (“GIT”)

Special Income Tax
Branch Profits Remittance Tax (“BPRT”)

Definition

Under Section 22(B) of the NIRC, the term “corporation” shall include:

a) partnerships, no matter how created or organized;

b) joint stock companies;
c) joint accounts (cuentas en participacion);
d) associations; or
e) insurance companies.

However, the term does not include:

a) General professional partnerships (GPPs)

AND

b) joint venture or consortium formed for the purpose of (1) undertaking

construction projects1 or (2) engaging in energy operations pursuant to an

1
To be exempt, the joint venture/consortium itself and all the co-venturers/consortium members
must be licensed as general contractors by the Philippine Contractors Accreditation Board
(PCAB) of the DTI.

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May 2021

operating or consortium agreement under a service contract with the

Government.

Classification of Corporations

(1) Domestic corporations.

(a) In general
(b) GOCCs EXC: SSS, GSIS, PHIC, LWDs
(c) Taxable partnerships
(d) Proprietary educational institutions/Non-profit hospitals;
(e) FCDUs of domestic banks
(f) Service contractors/subcontractors engaged in petroleum operations
(g) Ecozone enterprises
(h) Exempt corporations

(2) Resident Foreign corporations.

(a) In general
(b) Resident international carriers
(c) OBUs
(d) ROHQs/RHQs of MNCs
(e) Service contractors/subcontractors engaged in petroleum operations
(f) Ecozone enterprises

(3) Non-resident foreign corporation

(a) In general
(b) Non-resident owners/lessors of vessels chartered by Philippine
nationals;
(c) Non-resident owners/lessors of aircraft, machineries, and other
equipment;
(d) Non-resident cinematographic film owner, lessor, or distributor;

(4) Exempt Corporations

Types of Income Subject to Tax

(a) Ordinary Income/Net Income – refer to “Ordinary Income” table

(b) Passive Income – refer to “Passive Income” and “Intercorporate

Dividend” tables

(c) “Capital Gains”

JVs involving foreign contractors may also be exempt if (a) the foreign contractor is covered by
a special license as a contractor by the PCAB; and (b) project is certified by the appropriate
government office that the construction project is a foreign-financed or internationally-funded
project in which international bidding is allowed.

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May 2021

Ordinary Income (in ITR)

Source of
Corporate Taxable Tax Base Tax Rates
Taxpayer Income

Within and Net Income

1. Domestic without the 30%
Philippines (a)

Within the
2. RFC Net Income 30%
Philippines only

Gross Income Final

Within the
3. NRFC enumerated by withholding tax
Philippines only
law of 30%

(a) Format in the ITR:

Sales, Revenues, Receipts, net xxxxx

Less: COGS/COS (xxxx)
Gross Income from Operations xxxxx
Add: Other taxable income not subject
to final taxes xxxxx
Total Gross Income xxxxx
Less: Itemized Deductions or OSD (xxxx)
Net Taxable Income xxxxx
x Tax Rate x 30%
Regular Corporate Income Tax (RCIT) xxxxx

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May 2021

PASSIVE INCOME

DOMESTIC
Passive Income and RFC NRFC

Interest on currency bank 20% 30%

deposit

Yield or any other monetary

benefit from:
(1) Deposit substitutes 20% 30%
(2) Trust funds, and 20% 30%
similar arrangements

Royalties 20% 30%

Interest from a depositary 7.5% (RFC) Exempt

bank under the expanded 15% (DC)2
foreign currency deposit
system

Prizes ITR 30%

Intercorporate Dividend
Payor Recipient Tax
1. Domestic corporation DC Not taxable
2. Domestic corporation RFC Not taxable
3. Domestic corporation NRF 15% FWT3

100% of dividend is taxable and

4. Foreign corporation
5. Foreign corporation
6. Foreign corporation
DC
included in the ITR of the recipient
GR: Not taxable
EXC: If part of the dividend is sourced
RFC within the Philippines, such part shall
be taxable and shall be included in the
ITR of the recipient
GR: Not taxable
EXC: If part of the dividend is sourced
NRFC within the Philippines, such part shall
be taxable and shall be subject to a
30% FT.

2
Before January 1, 2018, the final tax rate was 7.5%.
3
The 15% FWT is imposed if the country in which the NRFC is domiciled allows a tax credit
against the corporation’s tax due equivalent to 15% which is the difference between the regular
rate of 30% and the 15% tax rate on dividends. If the foreign country does not allow such
credit in favor of the NRFC, then the tax rate on such dividends shall be 30%.
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May 2021

BIR Forms filed by the Payor of the Passive Income:4

Monthly Remittance (Form 0619F) Filed not later than the 10th day of the
month following the month when
withholding was made. Filed for the
first two (2) months of each calendar
quarter.
Quarterly Remittance (Form 1601- Filed not later than the last day of the
FQ) month following the close of the quarter
during which withholding was made.

Attachment: Quarterly Alphabetical

List of Payees (QAP) reflecting the
name of the payees, their TIN, amount
of income paid to each, and FT withheld
from each.

Quarterly Remittance of FTs
Withheld on Interest paid on
Deposits/Deposit
Substitutes/Trusts/Etc (Form
1602Q)
Annual Information Return of
FWTs (Form 1604-F)
Filed not later than the last day of the
month following the close of the
quarter.
Filed on or before January 31 of the
year following the calendar year in
which the income payments subject to
FWTs were paid or accrued.

Annual alphalist of payees, income

payments, and FWTs shall be reflected
in the Schedules of Form 1604-F.

Capital Gains Tax on Capital Gains

1. Sale, exchange, or other disposition of domestic shares of stock:

(a) Not traded at the stock exchange:

By Domestic Corporation:
Net capital gain 15%5

By Foreign Corporation:
Net gain not over ₱100,000 5%
Amount if excess of ₱100,000 10%

4
These are also used to pay other final taxes that may be imposed on income payments received
by juridical entities.
5
Before January 1, 2018, the net capital gain was taxed as follows: 5% on the first ₱100,000
plus 10% on the excess over ₱100,000.
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May 2021

BIR Forms to be filed:

Form 1707 Filed within thirty (30) days after each transaction
Form 1707-A Filed on or before the 15th day of the 4th month
(Final following the close of the preceding taxable year.
Consolidated
Return)

(b) Shares listed and traded at the stock exchange:

6
/10 of 1% based on the gross selling price.6

BIR Form to be filed by the Stockbroker who effected the sale:

Form No. Filed within five (5) banking days from the date of
2552 collection

Notes:

(1) Final tax on capital gains on the sale of shares of stock applies to all
corporate taxpayers.

(2) The exceptions for individual taxpayers also apply for corporate
taxpayers.

2. Sale of Real Property Classified as Capital Asset –

(a) Transaction subject – the sale, exchange, or other disposition of

lands and buildings which are not actually used in the business of
the corporation and treated as “capital assets”.

(b) Tax rate and base –

(1) Seller is domestic corporation – Final tax of 6% based on the

gross selling price or FMV, whichever is higher. The FMV is
the higher between the Commissioner’s value and the
Assessor’s value.

BIR Form to be Filed:

Form 1706 Filed within thirty (30) days following each

sale, exchange, or disposition of real property.

6
Before January 1, 2018, the rate was ½ of 1% of the gross selling price.

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May 2021

(2) Seller is RFC – Gain on sale is returnable, and subject to

normal tax rate (30%).

(3) Seller is NRFC – Final tax of 30% on the capital gain realized
on the sale.7

(c) Exemptions from the CGT –

(1) Sale of raw lands to be used for “socialized housing” projects, or

sold under the Community Mortgage Program under R.A. No.
7279 (Urban Development and Housing Act of 1992).
(2) Land transfers under the Comprehensive Agrarian Reform Law
of 1988.

DOMESTIC COMPANIES SUBJECT TO SPECIAL TAX RATES

(1) Proprietary educational institutions

Proprietary educational institutions are subject to a special tax rate of 10%

of taxable net income within and without the Philippines

(2) Hospitals which are non-profit

Hospitals which are non-profit are also subject to a special tax rate of 10%
of taxable net income within and without the Philippines

Provided – the gross income from unrelated trade, business, or other activity
does not exceed 50% of the total gross income derived from all sources.
However, if it exceeds 50%, the normal tax rate will be applied on the entire
taxable income (i.e. 30%).

(3) Final tax on income of a Foreign Currency Deposit Unit (“FCDU”)

of a local bank under the Expanded Foreign Currency Deposit
System (“FCDS”)

a) Income from foreign currency loans granted to Philippine residents,

(other than OBUs or other depository banks) – 10% final tax

b) Interest income from foreign currency interbank deposits – 10% final

tax
7
BIR Forms filed by the payor: Monthly Remittance Form (BIR Form 0619F), Quarterly
Remittance Form (BIR Form 1601FQ); Annual Information Return (BIR Form 1604-F).
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May 2021

c) Income from foreign currency transactions with non-residents, OBUs,

local commercial banks, and branches of foreign banks authorized
to transact business under the FCDS - Exempt

Note: “Income from foreign currency transactions” shall include interest

income from lending operations, including bank charges, commissions,
service fees, and net foreign exchange transaction gains.

(4) Service Contractors/Subcontractors Engaged in Petroleum

Operations

- Liable to an eight percent (8%) final tax on gross income derived

from such contract in petroleum operations.

Provided, however, that any income received from all other sources
within and without the Philippines in the case of domestic
contractors/subcontractors, shall be subject to the regular income tax
under the Tax Code.

(5) Ecozone Enterprises

All business enterprises registered with the Philippine Economic Zone

Authority (“PEZA”), SBMA, or CDA and operating within the Special
Economic Zones (“ECOZONE”) availing the 5% GIT incentive shall be
taxed 5% of gross income on registered activities. Three percent (3%)
shall be paid to the National Government; Two percent (2%) to the city
or municipality where the enterprise is located.

Notes:

(a) The exemption from all other taxes under the ITH and 5% GIT
regimes does not include the following:

1) Withholding taxes at source (expanded withholding tax

(“EWT”) and Final Withholding Tax (“FWT”)) on income
payments by PEZA-registered entities;
2) Withholding tax on compensation income of employees of
PEZA-registered entities; and
3) Fringe Benefits Tax (“FBT”) on fringe benefits given to
managerial or supervisory employees of PEZA-registered
entities.

These taxes are not the taxes of a PEZA-registered entity. Instead,

these are taxes of a PEZA-registered entity’s payees which are
withheld and remitted by the PEZA-registered enterprise.

(b) On the other hand, the BIR has ruled that all income payments
received from its customers related to its registered activities,

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May 2021

by a PEZA-registered enterprise, whether availing the ITH or 5%

GIT incentive, are exempt from the withholding tax.

(c) Income derived by an entity registered with the PEZA from its
registered activities shall be subject to such treatment as may be
specified in its terms of registration, i.e. (a) the ITH where such
income shall be exempt from the regular income tax; or (b) the 5%
preferential GIT, if the same has been approved.

However, the following shall be subject to the regular internal

revenue taxes (i.e., regular corporate income taxes; final taxes on
bank deposits, capital gains taxes, etc.):

(1) Income realized by registered entities from activities which

are not registered;
(2) Income of entities/individuals which are not registered (i.e.
income payments to entities in the Customs Territory, to
shareholders, and to non-registered creditors, etc.)
(3) Income of Service Enterprises or providers (e.g. those
providing customs brokerage, transportation, parcel, janitorial,
restaurant, banking, insurance services, etc.) which are
required by locator enterprises but which need not be
physically based inside the ECOZONE.

(6) Tourism Enterprises registered with the Tourism Infrastructure

and Enterprise Zone Authority (“TIEZA”)

As an alternative to the Income Tax Holiday (“ITH”) a new Registered

Tourism Enterprise (RTE) within a Tourism Enterprise Zone may, in lieu
of all national and local taxes except real estate taxes and fees as may
be imposed by the TIEZA, pay a tax of five percent (5%) on its gross
income earned from its registered activities.

The 5% gross income tax shall be remitted as follows:

(a) One-third to be proportionally allocated among affected cities or

municipalities based on the area of the RTE;
(b) One-third to the National Government; and
(c) One-third to the TIEZA.

(7) Microfinance NGO

A duly registered and accredited Microfinance NGO shall pay a two

percent (2%) tax based on its gross receipts from microfinance
operations in lieu of all national taxes. However, the non-microfinance
activities of Microfinance NGOs shall be subject to all applicable regular
taxes.

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May 2021

RESIDENT FOREIGN CORPORATIONS SUBJECT TO SPECIAL TAX RATES

(1) International carriers doing business in the Philippines shall pay a
tax of two and one-half percent (2 ½ %) of Gross Philippine Billings
(“GPB”)

GPB – Gross revenue derived from carriage of persons, excess baggage,

cargo and mail originating from the Philippines in a continuous
and uninterrupted flight, irrespective of the place of sale or issue
and the place of payment of the ticket or passage document;

Rules:

(1)Tickets revalidated, exchanged and/or indorsed to another international

airline form part of the Gross Philippine Billings if the passenger
boards a plane in a port or point in the Philippines;

(2) Provided, that for a flight or voyage which originates from the
Philippines, but transhipment of passenger takes place at any port
outside the Philippines on another carrier, only the aliquot portion of
the cost of the ticket corresponding to the leg flown from the
Philippines to the point of transhipment shall form part of the Gross
Philippine Billings.

(3) Where a passenger, his excess baggage, cargo, and/or mail originally
commencing his flight or voyage from a foreign port alights or is
discharged in any Philippine port, and thereafter boards or is loaded on
another airplane/vessel owned by the same international carrier, the
flight or voyage from the Philippines to any foreign port shall be
considered “originating from the Philippines” if the time intervening
between arrival to and departure from the Philippines exceeds forty-
eight (48) hours.

(a) If the failure to depart within 48 hours is due to reasons beyond the
control of the passenger such as when the next available flight or
voyage leaves beyond 48 hours, or such failure is due to force
majeure, the flight or voyage from the Philippines shall not be
considered “originating from the Philippines”;

(b) If the second aircraft/vessel belongs to a different international

carrier, the flight/voyage from the Philippines shall be considered
originating from the Philippines regardless of the length of the
intervening period between arrival to and departure from the
Philippines.

Preferential Rates

Under R.A. No. 10378, an international carrier or shipper is subject to the

Gross Philippine Billings Tax of 2½ %, unless it is subject to a
preferential rate or exemption on the basis of an applicable tax treaty or
international agreement to which the Philippines is a signatory or on the
basis of reciprocity.

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May 2021

Note: However, such carriers may earn compensation or commission

income from the sale of passage documents to cover off-line8
flights/voyages of its principal office, or on-line9 flights/voyages of
other carriers. Such income shall not be subject to the 2 ½% GPB tax,
but shall be subject to the regular rates of income tax.

(2) Offshore Banking Units

An offshore banking unit (“OBU”) shall mean a branch, subsidiary, or

affiliate of a foreign banking corporation which is duly authorized by the
BSP to transact offshore banking business in the Philippines.

a) Income from foreign currency loans granted to Philippine residents,

(other than OBUs or other depository banks) – 10% final tax
b) Interest income from foreign currency interbank deposits – 10% final
tax
c) Income from foreign currency transactions with non-residents, OBUs,
local commercial banks, and branches of foreign banks authorized
to transact business under the FCDS - Exempt

(3) Regional or Area Headquarters, and Regional Operating

Headquarters of Multinationals

(a) Regional or area headquarters (“RHQ”) of multinationals shall not be

subject to income tax.

(b) Regional operating headquarters (“ROHQ”) shall pay a tax of ten

percent (10%) of their taxable income (in the ITR) .

Note: Any income derived from Philippine sources by an ROHQ

when remitted to the parent company shall also be subject to
the tax on branch profit remittances.

(4) Service Contractors/Subcontractors Engaged in Petroleum

Operations

- Liable to an eight percent (8%) final tax on gross income derived from
such contract in petroleum operations

Note: Any income received from all other sources within the Philippines in
the case of foreign subcontractors shall be subject to the regular
income tax under the Tax Code.

8
Off-line carriers refer to international carriers having no transportation operations to and from
the Philippines.
9
On-line carriers refer to international carriers having or maintaining transportation operations
to and from the Philippines.
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May 2021

(5) Ecozone Enterprises and TIEZA-registered enterprises

- Such enterprises availing the preferential 5% GIT shall be taxed at 5% of

gross income from registered activities in lieu of all taxes, national or
local (see pages 8 and 9).

NON- RESIDENT FOREIGN CORPORATIONS SUBJECT TO SPECIAL TAX

RATES

In general, a non-resident foreign corporation is subject to a final withholding

tax of 30% based on enumerated gross income from all sources within the
Philippines, except –

Rate and Base

(1) Non-resident cinematographic 25% FT on its gross income from

film owner, lessor, or distributor all sources within the
Philippines

(2) Non-resident owner or lessor of 4 ½% FT on gross rentals or

vessels chartered by Philippine charter fees from leases or
nationals charters to Filipinos or
corporations, as approved by
the Maritime Industry Authority

(3) Non-resident owner or lessor of 7 ½% FT on gross rentals or fees

aircraft, machineries, and other
equipment

(4) Interest on foreign loans contracted 20% FT on the amount of interest

on or after August 1, 1986

(5) Income from transactions with Exempt

depository banks under the
expanded Foreign Currency Deposit
System

Note: Royalty is subject to the rate of 30% FT as it is not one of the items of
income subject to a special rate.

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May 2021

EXEMPT CORPORATIONS10

The following organizations shall not be subject to income tax in respect to

income received by them as such:

(A) Labor, agricultural, or horticultural organizations not organized

principally for profit;

(B) Mutual savings bank not having a capital stock represented by shares; and
cooperative banks without capital stock organized and operated for
mutual purposes and without profit;

(C) A beneficiary society, order, or association, operating for the exclusive

benefit of the members such as a fraternal organization operating under
the lodge system, or a mutual aid association or a non-stock corporation
organized by employees providing for the payment of life, sickness,
accident, or other benefits exclusively to the members of such society,
order, or association, or non-stock corporation or their dependents;

(D) Cemetery company owned and operated exclusively for the benefit of its
members;

(E) Non-stock corporation or association organized and operated exclusively

for religious, charitable, scientific, athletic, or cultural purposes, or for the
rehabilitation of veterans, no part of its net income or asset shall belong
to or inure to the benefit of any member, organizer, officer, or any specific
person;

(F) Business league, chamber of commerce, or board of trade, not organized

for profit and no part of the net income of which inures to the benefit of
any private stockholder or individual;

(G) Civic league or organization not organized for profit but operated
exclusively for the promotion of social welfare;

(H) A non-stock and non-profit educational institution;

(I) Government educational institutions;

(J) Farmers’ or other mutual typhoon or fire insurance company, mutual

ditch or irrigation company, mutual or cooperative telephone company,
or like organization of a purely local character, the income of which
consists solely of assessments, dues, and fees collected from members for
the sole purpose of meeting its expenses; and

(K) Farmers’, fruit growers’, or like association organized and operated as a

sales agent for the purpose of marketing the products of its members and
turning back to them the proceeds of sales, less the necessary selling
expenses on the basis of the quantity of produce finished by them.

10
Sec. 30, NIRC.
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May 2021

OTHER EXEMPT CORPORATIONS

(L) Child-caring or child-placing institutions licensed and accredited by the

Department of Social Welfare and Development (“DSWD”) to
implement the Foster Care Program under R.A. No. 10165, otherwise
known as the “Foster Care Act of 2012.”

(M) Duly registered cooperative on income from transactions with members

and non-members as long as the income is related to its main business or
purpose. Provided, those with accumulated reserves and undivided net
savings exceeding ₱10 Million shall be exempt only on income from
transactions with members.

(N) Homeowners’ Associations (“HOAs”). Generally, fees, dues or

contributions made to HOAs are taxable. However, the same are exempt
when the LGU having jurisdiction over the HOA certifies the lack of
resources for the HOA to render its services.

(O) Non-stock Savings and Loan Associations (“S&Ls”). S&Ls accumulate

savings of its members to be used for long-term loans to members. These
are exempt final taxes on interest income from deposits.

(P) Building and loan associations whose accounts are guaranteed by the
Home Guaranty Corporation.

(Q) Other organizations exempt from income tax in accordance with special
laws (exs. Philippine Red Cross; PDIC; Sports Facilities under the
control of the Philippine Sports Commission; Veterans’ Federation of the
Philippines; National Commission for Culture and the Arts, etc.)

Income Subject to Tax of Exempt Organizations

The following income, of whatever kind and character, of the foregoing

organizations shall be subject to income tax:

1. From any of their properties, real or personal; or

2. From any of their activities conducted for profit.

The said income shall be taxable regardless of the disposition made of such
income.

Exceptions to Taxability of Income of Exempt Organizations

(a) The income of non-stock, non-profit educational institutions which

are proven to have been actually, directly, and exclusively used for
educational purposes is exempt from taxes.11

11
For example, the lease of a portion of a school building for commercial purposes removes the
asset from the property tax exemption. In such case, the asset is not actually, directly, and
exclusively used for educational purposes. However, if the school actually, directly, and
exclusively uses for educational purposes the revenues/income earned from the lease of its
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May 2021

(b) The interest income from currency bank deposits and yield from
deposit substitute instruments of non-stock and non-profit
educational institutions, which income is used actually, directly, and
exclusively in pursuance of their purposes as an educational
institution, shall be exempt from the 20% final tax and from the 15%
tax on interest income under the expanded foreign currency deposit
system (“EFCDS”).12

(c) Duly registered cooperatives shall be exempt from all taxes on

transactions with insurance companies and banks, including but not
limited to the 20% final tax on interest deposits, and the 15% final tax
on interest income derived from a depository bank under the EFCDS.13

building, such revenues shall be exempt from taxes. The tax exemption of the
revenues/income does not hinge on the use of the asset, but on the actual, direct, and exclusive
use of the revenues/income for educational purposes (CIR vs. De La Salle University, Inc.,
Supreme Court G.R. No. 196596, November 9, 2016).
12
Sec. 3, DOF Order No. 137-87; RMC Nos. 76-2003, 24-2016 and 64-2016.
13
RMC No. 12-2010.
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May 2021

For-Profit Corporations Enjoying Exemption from Tax

1) BOI-registered enterprise14 enjoying ITH.

(1) New registered pioneer firms – 6 years from commercial operations.

(2) New registered non-pioneer firms – 4 years from commercial
operations.
(3) Expanding firms – 3 years from commercial operations of the
expansion.

In exceptional cases, existing firms undertaking new activities distinct

from existing operations may qualify as new projects subject to the setting
up of separate books of account. In such cases, only sales of such
registered products shall be entitled to the ITH exemption.

Additional Period of Availment

For new registered firms, the ITH incentive may be extended for an
extra year for each of the following cases, but in no case to exceed the
total period of eight (8) years for pioneer registered enterprises.

(1) If the average cost of indigenous raw materials used in the

manufacture of the registered product is at least fifty percent (50%)
of the total cost of raw materials for the preceding years prior to the
extension unless the BOI prescribes a higher percentage; or
(2) If the annual or average net foreign exchange savings or earnings
(“NFEE”) amount to at least US$500,000.00 during the first three
(3) years of operations to be determined by the Board at the end of
such three-year period.

2) PEZA-registered and TIEZA-registered enterprises availing of the

ITH.

14
To qualify for BOI registration, the corporation, partnership, or association must be engaged
or is proposing to engage:

1) in an area of activity listed in the Investment Priorities Plan (“IPP”);

2) if its area of activity is not listed in the IPP, it is a domestic enterprise at least 60% owned by
Filipinos with at least 50% of its production for export;
3) a domestic enterprise less than 60% is owned by Filipinos but exporting at least 70% of its
production or exporting part of its production under such terms and conditions and/or limited
incentives as the Board may determine;
4) producing or manufacturing a product which is used as input to an export product;
5) export trading of export products bought by it from one or more export producers;
6) rendering service to domestic and foreign tourists if listed in the IPP;
7) in rendering technical, professional or other services as may be determined by the Board
which are paid for in foreign currency; or
8) in exporting television and motion pictures and musical recordings made or produced in the
Philippines, either directly or through an export trader (Rule I, Sec. 1(i), IRR of E.O. No.
226).

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May 2021

3) Enterprises registered as Barangay Micro Business Enterprise

(“BMBE”)

A Barangay Micro Business Enterprise or BMBE refers to any domestic

business entity or enterprise15 engaged in the production, processing, or
manufacturing of products or commodities, including agro-processing,
trading, and services16, which activities are barangay-based and micro-
business in nature, and whose total assets including those arising from
loans but exclusive of the land on which the particular business entity's
office, plant and equipment are situated, shall not be more than Three
Million Pesos (₱3,000,000.00).

Registration

The Department of Trade and Industry (“DTI”), through the Negosyo

Center in the city or municipality, shall have the sole power to issue the
Certificate of Authority for BMBEs to avail of the benefits under R.A. No.
9178.

Upon approval of registration of the BMBE, the Negosyo Center shall issue
the Certificate of Authority which shall be renewable every two (2) years.
The DTI, through the Negosyo Center, may charge a fee therefor which
shall not be more than One Thousand Pesos (₱1,000) to be remitted to the
National Government.

Tax Exemption

Income tax exemption from income arising from the operations of the
enterprise.

A duly registered BMBE shall be exempt from income tax on income

arising purely from its operations as such BMBE. Provided, the income
tax exemption shall not apply to (a) income subject to final taxes, (b)
capital gains subject to the capital gains tax, and (c) compensation income
(d) income from practice of a profession received directly from clients; and
(e) other income not effectively connected with the operations of the
BMBE.

The LGUs are encouraged either to reduce the amount of local taxes, fees
and charges imposed or to exempt the BMBEs from local taxes, fees and
charges (Sec. 7, R.A. No. 9178).

15
Entity or organization incorporated or organized under Philippine laws, i.e. domestic entity.

16
The term “services” excludes services rendered by juridical persons such as partnerships or
corporations engaged in consultancy, advisory, and similar services where the performance of
such services are essentially carried out through licensed professionals (DOF D.O. 17-04).

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May 2021

PENALTY TAXES IMPOSED ON CORPORATIONS

I. Minimum Corporate Income Tax (“MCIT”)

1. Who are subject?

(a) Domestic corporations, and

(b) Resident foreign corporations.

2. Rate and Base – Two percent (2%) of gross income. The taxpayer shall
pay whichever is higher between the MCIT and the regular corporate
income tax (“RCIT”).

Gross income (sale of goods) – The term “gross income” shall mean
gross sales less sales returns, discounts and allowances, and cost of
goods sold. “Cost of goods sold” shall include all business expenses
directly incurred to produce the merchandise to bring them to their
present location and use.

Gross income (sale of services) – In the case of taxpayers engaged in

the sale of services, “gross income” means gross receipts less sales
returns, allowances, discounts, and cost of services. “Cost of services”
shall mean all direct costs and expenses necessarily incurred to provide
the services required by the customers and clients, including –

(a) Salaries and employee benefits of personnel, consultants, and

specialists directly rendering the service, and

(b) Cost of facilities directly utilized in providing the service such

as depreciation or rental of equipment used and cost of supplies.

Provided, that in the case of banks, “cost of services” shall include

interest expense.17

Note: However, according to the regulations, the term “gross income” will
also include all items of gross income enumerated under Section 32,
whether or not derived from the taxpayer’s core business, except:18

(a) Income exempt from income tax; and

(b) Income subject to final withholding tax.

3. Effectivity – The fourth (4th) taxable year immediately following the year
in which such corporation commenced its business.

4. Carry forward of excess minimum tax – Any excess of the MCIT over the
regular corporate income tax (“RCIT”) in a particular year shall be

17
Sec. 27 (E) (4), NIRC.
18
RR 12-2007.
18
May 2021

carried forward and credited against the regular income tax for the three (3)
immediately succeeding taxable years.

5. Domestic Corporations Not Subject to MCIT

The minimum corporate income tax (“MCIT”) shall apply only to domestic
corporations subject to the regular corporate income tax (30%).19
Accordingly, the following shall not be subject to MCIT –

(a) Domestic corporations operating as proprietary educational institutions

subject to tax at ten percent (10%) on their taxable income;

(b) Domestic corporations engaged in hospital operations which are non-

profit subject to tax at ten percent (10%) on their taxable income;

(c) Domestic corporations engaged in business as depository banks under

the expanded foreign currency deposit system, otherwise known as
Foreign Currency Deposit Units (“FCDUs”) on their –

(1) Income from foreign currency transactions with non-residents,

offshore banking units in the Philippines, local commercial banks,
including branches of foreign banks, and other depository banks,
and

(2) Interest income from foreign currency loans granted to residents of

the Philippines under the expanded foreign currency deposit system,
subject to final tax at ten percent (10%) of such income.

(d) Firms that are taxed under special income tax regimes such as PEZA-
and TIEZA-registered firms availing of the 5% GIT incentive.

6. Resident Foreign Corporations Not Subject to MCIT –

The minimum corporate income tax shall apply only to resident foreign
corporations which are subject to the regular income tax (30%).
Accordingly, the MCIT shall not apply to the following –

(a) Resident foreign corporations engaged in business as “international

carrier” subject to tax at 2.5% of their “Gross Philippine Billings”;

(b) Resident foreign corporations engaged in business as Offshore

Banking Units (“OBUs”) on their –

(1) Income from foreign currency transactions with non-residents,

other offshore banking units, local commercial banks, including
branches of foreign banks, and

19
Except Real Estate Investment Trusts (REITs). REIT is the only domestic corporation which
is subject to the 30% RCIT, but not subject to the MCIT.

19
 May 2021

(2) Interest income from foreign currency loans granted to residents

of the Philippines, subject to final tax at ten percent (10%) of
such income.

(c) Resident foreign corporations engaged in business as regional

operating headquarters subject to tax at ten percent (10%) of their
taxable income;

(d) Firms that are taxed under special income tax regimes such as those
PEZA- and TIEZA-registered firms availing of the 5% GIT incentive.

7. Relief From the Minimum Corporate Income Tax

The Secretary of Finance, upon the recommendation of the Commissioner,

may suspend imposition of the MCIT upon submission of proof that the
corporation sustained substantial losses on account of –

(a) A prolonged labor dispute;

(b) Because of “force majeure”;
(c) Because of legitimate business reverses.

Rules in Computation of MCIT

1) Excess MCIT, if any, for the year is computed annually, that is, in the 4th
quarterly (annual) return.

2) The quarterly tax shall be the higher of the RCIT or the MCIT.

3) IF the quarterly tax due is the MCIT, the excess MCIT from previous
taxable year(s) shall not be allowed to be credited. However, (1) creditable
withholding taxes, (2) quarterly income tax payments paid in the previous
quarter(s), and (3) excess tax credits of the prior year, are allowed as credits
against the quarterly MCIT due.

4) If the quarterly tax due is the RCIT, the (1) excess MCIT from previous
taxable year(s), (2) creditable taxes withheld, (3) quarterly income tax
payments paid in previous quarter(s), and (4) excess tax credits of the prior
year, are allowed as credits against the quarterly RCIT due.

II. IMPROPERLY ACCUMULATED EARNINGS TAX

Concept of the Tax

In order to compel corporations to distribute or pay dividends to stockholders,

the retention or accumulation of earnings or profits beyond the reasonable
needs of the business is made subject to tax.

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May 2021

The IAET is imposed upon corporations which are formed or availed of for the
purpose of avoiding the income tax with respect to its stockholders or the
stockholders of any other corporation by permitting earnings and profits to
accumulate instead of being divided or distributed.20

The IAET is an additional tax to the regular corporate income tax imposed on
corporations under Title II of the Tax Code.21

Corporations Subject to IAET

The tax is imposed on improperly accumulated taxable income earned starting

January 1, 1998 by domestic corporations (as defined under the Tax Code)
which are classified as closely-held corporations.22

Note: A branch of a foreign corporation is not liable for the IAET the same
being a resident foreign corporation.

Closely-held Corporations Defined.

These are corporations where at least fifty percent (50%) in value of the
outstanding capital stock or at least fifty percent (50%) of the total combined
voting power of all classes of stock entitled to vote is owned directly or
indirectly by or for not more than twenty (20) individuals.23

Corporations Not Subject to IAET

The IAET shall not apply to the following corporations:

(a) Banks and other non-bank financial intermediaries;

(b) Insurance companies;
(c) Publicly-held corporations;
(d) Taxable partnerships;
(e) General professional partnerships;
(f) Non-taxable joint ventures; and
(g) Enterprises duly registered with the TIEZA under R.A. 9593, the PEZA
under R.A. 7916, and enterprises registered pursuant to the Bases
Conversion and Development Act of 1992 under R.A. 7227, as well as
other enterprises duly registered under special economic zones declared
by law which enjoy payment of special tax rates on their registered
operations or activities in lieu of other taxes, national or local.24

20
Sec. 29 (B) (1), NIRC).
21
Sec. 29 (A), NIRC).
22
Sec. 4, Rev. Regs. No. 2-2001.
23
Ibid.
24
Ibid.

21
May 2021

Circumstances Indicative of Purpose to Avoid the Tax

(1) Dealings between the corporation and its shareholders, such as withdrawals
by the shareholders as personal loans;

(2) Expenditure of funds by the corporation for the personal benefit of the
shareholders;

(3) The investment by the corporation of undistributed earnings in assets

having no reasonable connection with the business;

(4) Advances in substantial sums made yearly to corporate officers who are at
the same time the stockholders;25

(5) Investment of substantial earnings and profits of the corporation in an

unrelated business or in the stock or securities of an unrelated business;

(6) Investment in bonds and other long-term securities;

(7) Accumulation of earnings in excess of 100% of paid-up capital, not

otherwise intended for the reasonable needs of the business.

Proper Accumulation of Profits

The following constitute accumulation of earnings for the reasonable needs of

the business:

(a) If retained for working capital needed by the business;

(b) Allowance for the increase in the accumulation of earnings up to 100% of

the paid-up capital of the corporation as of the balance sheet date, inclusive
of accumulations taken from other years;

(c) Earnings reserved for definite corporate expansion projects or programs

requiring considerable capital expenditure as approved by the Board of
Directors or equivalent body;

(d) Earnings reserved for building, plants, or equipment acquisition as

approved by the Board of Directors or equivalent body;

(e) Earnings reserved for compliance with any loan covenant or pre-existing
obligation established under a legitimate business agreement;

(f) Earnings required by law or applicable regulations to be retained by the

corporation or in respect of which there is a legal prohibition against its
distribution;

25
Basilan Estates vs. Commissioner, GRL-22492, September 5, 1967.
22
May 2021

(g) In the case of subsidiaries of foreign corporations in the Philippines, all

undistributed earnings intended or reserved for investments within the
Philippines as can be proven by corporate records and/or relevant
documentary evidence.26

Tax Base or Basis of the Tax

The rate of the IAET is 10%. It is based upon the improperly accumulated
taxable income for each taxable year.

Formula –

Current Year’s Taxable Income

Plus: 1) Income exempt from tax;

2) Income excluded from gross income;
3) Income subject to final tax;
4) Amount of NOLCO deducted.

Less: 1) Dividends actually or constructively paid from applicable year’s

taxable income;
2) Income taxes paid or payable for the taxable year (both income tax
in the ITR and final taxes); and
3) Amounts reserved for the reasonable needs of the business from the
applicable year’s taxable income or 100% of paid-up capital,
whichever is higher.

Equals: IAET

Notes:

1) Once the profit has been subjected to IAET, the same shall no longer be
subjected to IAET in later years even if not declared as dividend.

2) Notwithstanding the imposition of IAET, profits which have been

subjected to IAET, when finally declared as dividends, shall nevertheless
be subject to tax on dividends imposed under the Tax Code except in those
instances where the recipient is not subject thereto.

Period For Payment of Dividend/Payment of IAET

The dividends must be declared and paid or issued not later than one (1)
year following the close of the taxable year. Otherwise, the IAET, if any,
should be paid within fifteen (15) days thereafter.27

BIR Form 1704 (IAET Return) shall be filed within 15 days after the close
of the year immediately succeeding a taxpayer’s covered taxable year.

26
Sec. 3, RR 2-2001.
27
Sec. 6, RR 2-2001.
23
May 2021

SPECIAL INCOME TAXES

The Tax Code presently has two types of special income taxes, namely the branch
profits remittance tax, and the gross income tax.

I. BRANCH PROFITS REMITTANCE TAX (“BPRT”)

(a) Transaction subject – Any profit remitted by a branch of a foreign

corporation to its head office (Sec. 28 (A) (5), NIRC).

This includes any income derived from Philippine sources by the

Regional Operating Headquarters of a multinational corporation when
remitted to the parent company (R.A. No. 8756).

(b) Rate and Base – Fifteen percent (15%) final tax on the total profits
applied or earmarked for remittance (gross of the BPRT), except those
activities which are registered with the –

(1) Philippine Economic Zone Authority (“PEZA”);

(2) Subic Bay Metropolitan Authority (“SBMA”);
(3) Clark Development Authority (“CDA”); and
(4) Tourism Infrastructure and Enterprise Zone Authority
(“TIEZA”)

(c) Income not treated as branch profits – Income which are not connected
with the trade or business in the Philippines shall not be treated as
“branch profits.”
Ex. Dividends from marketable securities

(d) Tax treaties. The 15% rate may be reduced by international treaties to
which the Philippines is a signatory.

(e) Forms to be filed. The same forms filed for the monthly remittance of
final taxes (BIR Form 0619F), for the quarterly remittance of final taxes
(BIR Form 1601-FQ) and the annual information return for FWTs (BIR
Form 1604-F) shall be filed in paying the BPRT. See pages 4 and 5 for
the deadlines for filing such forms.

II. GROSS INCOME TAX (“GIT”)

Under Section 27(A) of the Tax Code, the President, upon recommendation of
the Secretary of Finance, may allow corporations the option to be taxed at
fifteen percent (15%) of gross income as defined in the Tax Code instead
of the 30% net income tax.

(a) Corporations given the option – The option is available to domestic

and resident foreign corporations (Secs. 27 (A) and 28 (A) (1),
NIRC).

24
May 2021

(b) Requisite conditions – The option is available after the following

conditions have been satisfied:

1) A tax ratio effort of twenty percent (20%) of Gross National

Product (“GNP”);

2) A ratio of forty percent (40%) of income tax collection to total tax

revenues;

3) A VAT tax effort of four percent (4%) of GNP; and

4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector

Financial Position (“CPSFP”) to GNP.

(c) Additional requisite – The option shall be available only to firms

whose ratio of cost of sales to gross sales or receipts from all sources
does not exceed fifty-five percent (55%)

(d) Period of irrevocability – The election of the gross income tax option
by the corporation shall be irrevocable for three (3) consecutive
taxable years during which the corporation is qualified under the
scheme.

(e) Rate and base – Fifteen percent (15%) of gross income where gross
income shall be equivalent to gross sales less sales returns, discounts,
and allowances, and cost of goods sold.

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 May 2021

EXPANDED WT ON INCOME PAYMENTS OF

CORPORATE PAYEES EWT Rate

(1) Professionals (Lawyers, CPAs, Engineers, etc.)

- If gross income of payee for the current year did not exceed ₱720,000 10%
- If gross income of payee exceeds ₱720,000 15%
(2) Professional Entertainers such as, but not limited to actors, singers,
lyricists, composers, emcees
- If gross income of payee for the current year did not exceed ₱720,000 10%
- If gross income of payee exceeds ₱720,000 15%
(3) Professional Athletes including basketball players, pelotaris, and
jockeys
- If gross income of payee for the current year did not exceed ₱720,000 10%
- If gross income of payee exceeds ₱720,000 15%
(4) Directors and Producers involved in movies, stage, radio, television,
and musical productions
- If gross income of payee for the current year did not exceed ₱720,000 10%
- If gross income of payee exceeds ₱720,000 15%
(5) Management and Technical Consultants
- If gross income of payee for the current year did not exceed ₱720,000 10%
- If gross income of payee exceeds ₱720,000 15%
(6) Business and Bookkeeping Agents and Agencies
- If gross income of payee for the current year did not exceed ₱720,000 10%
- If gross income of payee exceeds ₱720,000 15%
(7) Insurance Agents and Insurance Adjusters
- If gross income of payee for the current year did not exceed ₱720,000 10%
- If gross income of payee exceeds ₱720,000 15%
(8) Other Recipients of Talent Fees
- If gross income of payee for the current year did not exceed ₱720,000 10%
- If gross income of payee exceeds ₱720,000 15%
(9) Rentals: On gross rental or lease for the continued use or possession of
personal property in excess of Ten Thousand Pesos (₱10,000) annually,
and real property used in business which the payor or obligor has not 5%
taken title or is not taking title to, or in which he has no equity; poles,
satellites, transmission facilities and billboards.
(10) Cinematographic film rentals, and other payments to resident 5%
corporate cinematographic film owners, lessors, or distributors.
(11) Income payments to certain contractors 2%
(12) Gross commissions or service fees of customs, insurance, stock,
immigration and commercial brokers; fees of agents of professional
entertainers and real estate service practitioners (RESPs) (i.e. real
estate consultants, real estate appraisers, and real estate brokers)
- If gross income of payee for the current year did not exceed ₱720,000 10%
- If gross income of payee exceeds ₱720,000 15%
(13) Professional fees paid to Medical Practitioners (includes doctors of
medicine, doctors of veterinary science, and dentists) by hospitals
and clinics or paid directly by Health Maintenance Organizations
(HMOs) and/or similar establishments
- If gross income of payee for the current year did not exceed ₱720,000 10%
- If gross income of payee exceeds ₱720,000 15%

26
 May 2021

(14) Income Payments made by Credit Card Companies 0.5%

(15) Income Payments made by the Government and government-owned
and controlled corporations (GOCCs)
- To its local/resident suppliers of goods other than those covered by 1%
other rates of withholding tax
- To its local/resident suppliers of services other than those covered by 2%
other rates of withholding tax
(16) Income Payments made by Top Withholding Agents28, 29
- To their local/resident suppliers of goods other than those covered by 1%
other rates of withholding tax
- To their local/resident suppliers of services other than those covered by 2%
other rates of withholding tax
(17) Commissions, Rebates, Discounts and Other Similar Considerations
Paid/Granted to Independent and/or Exclusive Sales
Representatives and Marketing Agents and Sub-Agents of
Companies, including Multi-Level Marketing Companies
- If gross income of payee for the current year did not exceed ₱720,000 10%
- If gross income of payee exceeds ₱720,000 15%
(18) Payments by Pre-Need Companies to Funeral Parlors 1%
(19) Tolling Fees Paid to Refineries 5%
(20) Income Payments Made To Suppliers of Agricultural Products in 1%
Excess of Cumulative Amount of ₱300,000 Within the Same Taxable
Year
(21) Income Payments on Purchases of Minerals, Mineral Products, and 5%
Quarry Resources, such as but not limited to silver, gold, marble,
granite, gravel, sand, boulders, and other mineral products except
purchases by the Bangko Sentral ng Pilipinas
(22) Income Payments on Purchases of Minerals, Mineral Products, and 1%
Quarry Resources by the Bangko Sentral ng Pilipinas from Gold
Miners/Suppliers under P.D. No. 1899, as amended by R.A. No.
7076
(23) On Gross Amount of Refund Given by MERALCO to Customers 15%
with Active Contracts as Classified by MERALCO
(24) On Gross Amount of Interest on the Refund of Meter Deposit 10%
Whether Paid Directly to the Customers or Applied Against the
Customer's Billings of Residential and General Service Customers
Whose Monthly Electricity Consumption Exceeds 200 KWH as
Classified by MERALCO

28
Under RR No. 7-2019, a top withholding agent (TWA) is a taxpayer whose gross
sales/receipts or gross purchases or claimed itemized deductions, as the case may be,
amounted to ₱12.0 Million during the preceding taxable year. However, taxpayers who were
classified as TWAs prior to the effectivity of RR 7-2019 shall remain TWAs until it is
determined that they failed to satisfy the aforesaid criteria and are delisted from the existing
list of TWAs.
29
Top withholding agents (TWAs) are obligated to withhold 1% or 2% on (a) their purchases
of goods and services, respectively, from regular suppliers, and (b) casual purchases worth
₱10,000 and above.

Regular suppliers are defined as suppliers with whom the taxpayer-buyer has at least six (6)
transactions, regardless of amount, either in the previous year or current taxable year.
27
 May 2021

(25) On Gross Amount of Interest on the Refund of Meter Deposit

Whether Paid Directly to the Customers or Applied Against the
Customer's Billings of Non-Residential Customers Whose Monthly 15%
Electricity Consumption Exceeds 200 KWH as Classified by
MERALCO
(26) On Gross Amount of Interest on the Refund of Meter Deposit
Whether Paid Directly to the Customers or Applied Against the
Customer's Billings of Residential and General Service Customers 10%
Whose Monthly Electricity Consumption Exceeds 200 KWH as
Classified by Other Electric Distribution Utilities (DUs)
(27) On Gross Amount of Interest on the Refund of Meter Deposit
Whether Paid Directly to the Customers or Applied Against the
Customer's Billings of Non-Residential Customers Whose Monthly 15%
Electricity Consumption Exceeds 200 KWH as Classified by Other
Electric Distribution Utilities (DUs)
(28) Income Payments Made by Political Parties and Candidates of 5%
Local and National Elections on all their Purchases of Goods and
Services Related to Campaign Expenditures, and Income Payments
made by Individuals or Juridical Persons for their Purchases of
Goods and Services Intended to be Given as Campaign
Contributions to Political Parties and Candidates

(29) Income Payments Received by Real Estate Investment Trusts 1%

(REITs)
(30) Interest Income Derived from any Debt Instrument Not Within the 15%
Coverage of Deposit Substitutes and Rev. Reg. No. 14-2012.
(31) Income Payments on Locally Produced Raw Sugar 1%

28